You might call Eaton Vance Worldwide Health Sciences Fund a way to shepherd a drug from bright idea to broad consumer use via the stock market. The fund has about half its assets in biotechnology stocks, a notoriously unpredictable and volatile group whose ups and downs often hinge on the results of clinical trials. To calm the portfolio down, long-time manager Samuel D. Isaly invests in a healthy dose of pharmaceutical companies, which account for 38% of fund assets. The rest of the fund is in cash equivalents.

Isaly, who has analyzed health care stocks for more than three decades and who has managed the fund since 1989, prefers to classify his holdings as "discovery" and "distribution" companies because he believes those terms form a more accurate depiction of their respective roles. The discovery side of the $2.6 billion portfolio consists of companies involved in drug research and development, a group that many view as the standard biotech fare that dominates most biotechnology fund portfolios. Names here run the gamut from small start-ups to industry veteran Genentech. Pharmaceutical giants with the marketing muscle to bring nascent drugs into the public eye, such as Schering-Plough, Eli Lilly & Co. and Pfizer, dominate the distribution side. Stocks from the two groups are analyzed and selected by Isaly and his staff at OrbiMed Advisors, a New York City research firm specializing in drug and pharmaceutical investing.

What you generally won't find in this fund are the staples that dominate the portfolios of many health care sector offerings, such as medical device, hospital management or medical service companies. "Service companies are a low-margin business with heavy payroll costs, and they are not associated with technological advancement," says Isaly. While he likes some of the innovations associated with the medical device industry, he is wary of their short product lifespans and patent snafus.

Companies that pioneer new drugs, he says, offer the potential for higher rates of return than do those sectors. They can also offer a pretty wild ride. In May 2003, shares of Genentech soared 45% in one day alone as investors celebrated favorable trial results for a colon cancer drug called Avastin. But war stories like that of La Jolla Pharmaceuticals, whose stock plunged more than 70% one day last year when trials for a drug to treat lupus yielded unfavorable results, litter the biotech landscape. And who can forget ImClone Systems, the company whose disappointing trial results helped give Martha Stewart a rap sheet.

And despite inroads toward profitability by some companies, the biotech industry as a whole remains awash in losses. According to Ernst & Young LLC, publicly traded biotechnology companies posted net losses of $41 billion between 1990 and 2003. Of the 50 largest publicly traded biotechnology companies, only 12 turned a profit last year. A sizable number of companies in the fund await profitability.

By combining biotech broncos with more stable pharmaceutical giants, Isaly removes some of the risk normally associated with biotechnology investing. "The portfolio beta is 0.8, so the fund is not as volatile as the market in general, and certainly not as volatile as pure biotechnology funds," he observes. Diversification through investment in foreign companies provides yet another risk softener. About one-quarter of fund assets are in stocks of companies based outside the United States.

Mixing market capitalizations also helps enhance diversification. About 62% of the fund's assets are in companies with stock valuations of more than $5 billion, with the remainder of equity assets in companies with market values that generally range from $500 million to $5 billion. "We'll invest in initial public offerings two or three times a year," says Isaly. "But this is not a 'hot new issues' fund." At one time, Isaly occasionally invested fund assets in private companies. He stopped the practice about two years ago, although OrbiMed Advisors continues to feed start-ups through its venture capital arm.

Morningstar analyst Christopher Davis gives credit to Isaly's three decades of experience analyzing health care stocks, as well as the strong track record he has compiled since he took charge of the fund in 1989. He is also impressed by OrbiMed's bench of a dozen analysts, who have a solid combination of science and business backgrounds. But Davis finds the fund's annual expense ratio of 1.97% "unacceptable" for a fund with more than $2.5 billion in assets.

Isaly has done an admirable job fighting against the headwind of high expenses by selecting a small basket of promising drug and distribution companies and sticking with them through their often-turbulent ups and downs. The fund typically owns between 35 to 50 names, making it a fairly concentrated offering, and it has a modest 26% turnover ratio.

The recent pickup in biotechnology stock prices has sparked a resurgence of initial public offerings in the sector, creating speculation that prices may be peaking. Isaly says he isn't concerned about an overheated market at this point. "This has been a big year for biotechnology IPOs, but few of them have come to market with large premiums," he says. "The market has been solid to accommodating." Despite price-earnings ratios of 90 or more for some fund holdings, such as Genentech and Genzyme, Isaly says that valuations "are between modest and low" and believes that the growth prospects for these companies justify their stock valuations.